The Fed, Space, Abortion, Energy, and Marijuana (Podcast)

I think this panel tops all panels that we've had in terms of I'm excited. We have Neil Grossman in the studio, one of my best friends, I'll say, and also the co founder and former c IO of t k n G Capital Markets. Um, we've been talking about the FED and rates for I don't know twenty years now. Um. Daniel D. Martino Booth just uh walked in the studio from Quill Investment Strategy. He also used to uh sorry,

Quill Intelligence. She also used to advise the Federal Bank Federal Reserve Bank of Dallas, and her book on the FED is one of my favorite titles, called fed Up. Yes. So when you say we love the FED. We love talking about the FED. We might not love the FED. We're not telling you how we feel personally emotionally about

the Federal Reserve. And Priamisra. She was a long time UH guest, a regular guest on Bloomberg Rewind, which I'm gonna say is probably one of the top three shows that Bloomberg has ever produced television shows, and it's great to have her here. She's the managing director and global head of rate strategy for t D Securities. All right, guys, um, what do we expect Danie? I'll start with you, what do we expect from j Powell today? Obviously fifty basis points?

But what is he gonna say about the path forward, um after after the rate decision. So I think what's critical to focus on is if Powell UH sites year over year inflation as opposed to the dissipation in monthly increases in inflation, one of them is going to get him license to say, we've got to get rates higher, and we've got to keep and maintain them until we

see this year over year pace come down. If he emphasizes, you know the fact that he's seen in his core services X shelter absolutely favorite inflation metric that that itself is coming down and coming down quickly over the last three months. I think markets will love him. I love it. You know, when you think about this Federal Reserve this year, you know, just been very aggressively raising rates. As you look back on this year, what's your view of the Fed?

Have they gone far enough fast enough? Have they are they still behind? What have they done? What have they done? And when you talk to institutional clients, what do they tell you. I mean, there's a lot of frustration on the FED. I think the reaction function changed multiple times this year. I mean I think that you know, was that a credibility issue with the Fed at the start of the year, the start of the hiking cycle, and I know front looading was their favorite word for six months.

I think it was a catch up trade um where they were, you know, really trying to catch up for the fact that they started late. I think the question now is the threshold. The threshold to slow down the pace of hikes is different from the threshold to stop hiking, and it's very different from the threshold to ease. And the market is trying to figure out what these thresholds are now to your question, have they gone too far?

I think on rate hikes, our view is they may actually go more than what the markets pricing in at the end of the day, because I think inflation is going to be particularly cost services a little sticky on the way down. So I think they may have more to do. Where I think they've overdone it is on QT and they don't talk much about it, but it's you know, it's the reason why long and real rates

have risen. I think that's slowing the economy down. We think a recession is almost a done deal at this point in twenty three, so they've done a lot um. I think they have a little bit more to do, and then it's going to be really tricky for them next year. So some of the frustration with the FAT I think remains next year because we're gonna look for the FAT two ease and I think they're going to

struggling to ease with inflation still high. Next, speaking of frustration with the FED, let me bring a Neil Grossman here, and first let me say you've got to differentiate between how you feel about the FED, with the FED should be doing in your take, and what you expect the fed actually to do. Oh, you're right, I am very fed up. And then a couple of things. First of all, as you know, I don't think they've been hawkish. Um, they've barely done anything in the way they should have

because I call it, as you know, infinitesimal incrementalism. They haven't even done one Vulcan yet, as far as I'm concerned. Paul Vulcan raised rates four inter meeting on a weekend. That would have been something. And I'm sorry for you, but they don't. Haven't done quantitative tightening either. Letting something slowly drip drip away after they bought a hundred and thirty billion a month for ten years is not tightening.

So I mean, yes, there are effects, but to be honest with you, I would stop tightening now and announced this afternoon that I'm going to start selling bonds at a clip of fifty to a hundred billion a month. That would be effective per se. Now, what what are they going to do or not? I'm not going to disagree too much other than I think the thing you

need to watch or consider is the liquidity. I think if he focuses on acknowledging financial liquidity is easier now that I believe it was in March or very close to it. Leaving aside the housing market, but interest rates, the dollars weeken ten percent, stocks have risen. I mean, the risk here to me is we don't know where all this is going to come out of the back end. Daniel last time we were on, said clearly, and I agree with her, that inflation is coming down. I thought

it was gonna come a little slower. She's been very right. But at some point in the middle of next year, the comparisons are going to start to become very easy, and we will then settle into where the ambient inflation ray is. And if it's three to five, we have a problem in and reflating now only raises the possibility or likelihood down the road. So I think that's what I'd be focused. I'm going to push back as hard as I possibly can about quantitative tightening not taking place. Now.

There's something called the Employee Retention Credit. In the nine months through November, it injected a plus billion dollars into the economy. So there's still stimulus money running around out there that can't take away from the feds H eight that's released every Friday, afternoon after the close. It shows you one of the broadest measures of money supply in a real time week to week on a real time week to week basis, because we don't get money supply

indicators very often and they're lagged. And we've seen six consecutive weeks of year over year declines in what we call other deposits liabilities. Never, never in the history of the United States have we seen six consecutive weeks of year over year declines. Try pricing a commercial mortgage back

secure a spot plus six forty. A lot of things are screeching to a halt in terms of financing that are beyond residential real estate, but there are other sources of liquidity that, of course make it appear that it's as abundant as it is. Quantitative tightening is working. I'm crossing fingers the second time I've said it public Adday Mike McKee asked him if he is going to increase treasury roll off to make up for the fact that

they're so far behind schedule with mortgage backed securities. I do look at the FED balance sheet on the Bloomberg and it really hasn't come down that much. I know you're talking about uh F E D SPACE b A l GO, FED boal GO. I know you're talking about broader measures, but in terms of the balance sheet, they've gone from eight and a half trillion to eight point

two trillion. It's not a lot, but if you think about they're only fifteen billion dollars ten years ago, we're going to be at eight more than eight trillion dollars. You would have said, no way, we just did that for the Great Financial Crisis. We're not gonna do that again. Right. We're looking at a stock versus flow thing here, and the fact is we're doing it at a much more aggressive pace then we've even attempted in two thousand eighteen.

I'd love to hear thought on this pre you jump in, so you know, I think they are doing qt they you know, meaning that the balance sheet is slowing, it's declining slowly. I mean they've only ramped up in September to the full balance sheet gaps on treasuries. I agree mortgages are not running off as fast because they're not preeping, but look at the mortgage market, look at the housing market. I don't think they can sell mbs as a market

functioning issue. I think there's a market functioning issue in treasuries, so extend increasing QT and treasuries will worsen the liquidity in the treasury market, which you know, we need this market to function if the fixed income market has to exist and and price and we have to find price discovery. So I think they're doing the max in terms of QT. I struggle a little bit in terms of how do they think of the two tools that they have to

tighten policy between QT and rate hikes. We haven't heard much from the Fed on this front, like what is x billion in QT worth? And it's a nonlinear response, meaning the early part of QT I think is not a big deal because the liquidity was there was enough liquidity. Going down a live from very excess to excess is not a big deal. As you start getting to scarce level of reserves, which I think we're six months away from, but we're getting there, and as the supply starts to uh,

you know, increase. There's no martial buyer of duration in the US, not with an inverted curve, not with the fact that may still have to keep raising rates. I think that's the issue on the supply front. And you know, we talked about the data is okay right now, but there are I mean, we've all talked about these long and variable lags. I just struggle, Like the middle of next year, the savings buffer goes down, and now QT

is starting to have an impact. Level of rates is starting to have an impact when the economy slows down. How quickly can the FED turn? Do they stop QUT? I don't. I don't think they stop QUT until they start to cut rates and that inflation and if it starts to get to me, I'm a little nervous when

I hear four or five percent. We were thinking three percent, even three is well north of you know that two percent target, and the FED respond and we've been used to Every market has been used to the FED responding to slow down, and I just think this time around the FED might have to be resolute in their words. And then how does the market respond to that we need no monetary help, but no fie still help by the pre Let me step in a couple of things.

Of having traded an enormous amount of treasuries over generations. Um, the only reason liquidity is so bad is you have a central bank that destroyed the system at the end of the day and the curve and its representation is in large part due to the fact that they own everything. If you really want liquidity and markets, tell them to sell the entire balance sheet. You'll get a quick adjustment and then there will be plenty of bonds around to

play with and do what you need to do. But if you're going to ask somebody to, as you said, you know, nobody wants to buy the ration. Nobody wants to buy ration because a three and a half percent long bond and seven or eight or eight percent inflation rate is, to be honest with you, stupidity. Long long bonds. If they were where they should have been relative to FED funds, everyone would be buying them. Let's wait. You know what did Daniel Mark did? Did you work with Priya?

Did you guys? Were you freshmen together? Yeah? I was saying this during the break, Pria that when we were when we were both starting out in the industry, when we were teenagers and you were a Bank of America and I was at the FED, that you were one of my my closest contacts. So it could be on with you. I've enjoyed lots of FED conversations with Danielle. So let me Priya ask you about something that Danielle mentioned during the break which I wasn't really thinking about.

But all of the big hawks on this FED are rotating out and they're gonna be replaced with either doves or cash kry and like who knows which way he's gonna go depending on the politics. But um, what do you think that means for February one? Are we gonna see another fifty basis point hike after this or are they gonna step down? A? Yeah? And the market I think was like it was about fift priced for it. I think it's actually fair because we've had two CPI misses.

So if we get another week cp another point two or point three, I think they can step down. I do think then they can keep going at twenty five for a few more meetings. But it's interesting. I think the divisions at the FED will sound they will sound less unified. Um. And whether it's because of the rotating members to your point, or the fact that I think inflation and growth will point in different directions next year much more than this year. This year it was one

trade high inflation, so they were all very unified. But next year as inflation goes down but not all the way to two percent, and growth starts to slow down and the labor market more importantly starts to weaken, I think you'll see the FED sounding a lot more divided, and the voting members won't help either. So yeah, I think it's going to become a odd harder to call the FED next year. When do they stop? When do

the ease? What happens to QT? And the Fed will sound I think more divided on this, Daniel, We've got a function on the Bloomberg terminal d O t s the whole dot plot thing, Madging. I don't know what the heck it means, but um, it looks like it's going down starting in twenty three. Is that? Does that make sense to you? And and again as you raise the issue of the makeup of the FED, does that

make sense to you? Hang on the dots median rises in twenty three, There are a lot of settings on your Oh yeah, after three then it goes down to yeah. And I think what you can actually see today in the dot plot is that some some of those dots might move down in twenty three, So you might see a shift onto the devas spectrum. In fact, what I'll be looking for today is maybe the widest disparity that we've ever seen to pre as point, it's going to be much more more contentious. I think that Powell is

going to be facing multiple descents. One of the things that has been on his side, which has been surprising to me, given John Williams came from the San Francisco FED and has traditionally been adove, is that John Williams has been so loyal to Powell throughout this and I think that's gonna be critical next year because between between bar Bar being one of them, uh Williams, Powell, and Waller, He's not going to have that many more voters in

his camp. We forget that Powell suffered full blown mutiny in the very end with not a single person until Wayne Angel changed his vote back years and years ago. But I think it's going to be a much more contentious FED, and I think the dot plots are going to widen out a lot. I think I'm looking at four sixty two right now on the dot plot, so basically four seventy five is the upper range, and I'm gonna take the other side of that that Danielle I think they're going to for eight or five. Well, I

think that's possible. But I think the other interesting question is going to become again it's the lower the ultimate peak rate, the longer I think they're gonna end up having to maintain that level, because I think again it's going to become a question of of of sort of tug of war between the stimulative effects of not doing enough and the potential impact on prices and their ability

to ultimately push prices down low enough. You know, again, one of the things you might ask yourself, as we just went through two years, well, as of next month will have gone through two years over seven percent inflation. So we've already started a you know, sort of a process of of of of of wave process of pushing the consequences out. And so if it's going to take you, for example, you're here're hearing people talking we'll get to two percent at the end of next year, I find

that hard to believe. But if it takes five years or eight years to get you to two percent, it's very different than if you can get the two percent, say and two and a half years. And keep in mind, Mr Volker, even with rates it took it functionally took a generation to get to an ambient level has been done. I mean, I mean I put together a four and f one fifty and I'm looking at ninety dollars for an American pickup truck. That's just not that's the most

repossessed vehicle in America. And it's the twenty one and twenty two models that they're repossessing the most quickly mats because everybody has big payments and they got a friend who goes to auction. If you're ever interested, yeah, I'm definitely interested, So I'll tag along. What do you think? I mean the terminal rate, I guess is important. And

I think Neil brings up a great point. If they don't get higher quick enough, they're going to have to be stuck at their relatively lowly rate for longer, right. And I do think that next year, despite the market really begging for the fair two ease, I think they're going to sound very resolute and not ease or even pushback again some of the market pricing of cuts. And

I wonder I hope Jepal was asked about that. If you can lobby in a question too to Mr McKee to ask about the rate cuts is the market in the last month has priced in a lot more rate cuts in late twenty three twenty four. And while I think they're going to have to cut in twenty four because the unemployment rate will rise a lot, I struggled with the cuts in twenty three. Now on the dots, I think the median is going to move up for

twenty three. It's a fair point that, you know, I wish we had a mid twenty three dots because I would be a clear median or or clear estimate of terminal. But we don't have a mid twenty three. I don't think the FED wants to signal that they might get to terminal by the middle of the year and then

cut rates. So I'm going to be looking at that end twenty three as their estimate of terminal, and importantly the distribution of those dots, because the medium might be at five, but if you have a bunch of FED officials at five and a quarter or five and a half, the market is not priced for that. And this risk rally that's pricing in the FED terminal around five or below and then the FED quickly cutting rates. I think that is at risk. If the distribution of dots in

twenty three is high, and then twenty four. I think the market, the FED can keep saying that they're not going to cut too much, the market is going to all their bluff on it because the market is now increasingly pricing in a recession as the base case for the end of twenty three twenty four, and then if inflation comes down, the FED can justify some rate cuts.

But we know if they got hundred, the next hundred it looks a lot easier, and if unemployment goes up, they're going to have to I mean, does any of us really feel that the FED is independent? Danielle, Who did you work with in Dallas? I worked with Richard Fisher and he was He was different than most works. Okay,

but this fan was congenial and reluctant to descent. If we get five five and a half percent, if we get six percent unemployment, if we get people who can't put food on their families tables, I think this feed is really going to have resolved. And that's that's your question. We're seeing um small business closing. There's a website called daily job cuts dot com. At the fastest pace I spoke to the person who runs this website at the

fastest pace since two thousand and nine. There's there's actual pain out there in the economy, and there's a reason that you're seeing such disparity between the establishment and the household surveys in the in the jobs data, and that's because one of them is not telling you the true state of unemployment in America. One's playing catch up to the other. The thing is, again going back, the FED has a dual mandate, which is price stability basically zero,

and full employment. And it's a two factory zero, right, I mean, I guess they've decided it's two percent, and now some of them are thinking it could be three or four. But there's a reason for it. Well, now three for four a different issue, but the two percent, and I think it should they had it lower than that with low low unemployment. But the bottom line is it's a two factor optimization because as as as unemployment

drops too low, price pressures rise. At five and a half to six percent, the optimization model will give them plenty of room if they really feel that they have to cut depending on inflation, but a three and a half percent inflation rate with six percent unemployments is going to give them room three and a six unemployment rate with six or seven percent on flip inflation, which is basically stagflation at that point. Now they have a problem.

All right, guys, great stuff. Really appreciate it. Uh, this was a historic get together, some smart people kind of previewing what we might hear from our federal reserve today later.

Dana Washington d C, Neil Grossman, former c I O at t k n G Capital, and Daniel D. Martimo Booth, a CEO and Chief Strategist at Quill Intelligence, joining us here in our Bloomberg Interactive Broker studio and on the phone, Priam Isra, global head of Rate Strategy Managing director with t D Security has given a sense of what we

may hear later this afternoon. Of course, Michael McKee is Dana Washington d C. He'll have live reporting and the Bloomerk Surveillance team will have their show at one thirty Wall Street time. Million ways to go with our next guest here, George Ferguson. He's a senior aerospace, defense and airline analysts for Bloomberg Intelligence. UH Penn State graduate, former military intelligence officer in the U. S Army, So we

thank them as always for his service. George, There's a lot of stuff going on in your space here today. We I want to start just with the airline's real quick, because just in the last couple of days, we had Delta take some numbers up that kind of surprised me. Uh. Number two, we had United saying they're gonna buy a bunch of Boeing jets. Uh, that sounds pretty positive to me. Just give us the state of the airline business today. Where are we? Kind of visa VI Yeah, so thanks

for me on, thanks for kind words. Um, where are we? So we actually just published a report this morning on airfares, and I think where we are is that the markets that have been opened the longest, which are going to be domestic US I'm talking to US carriers, and uh, Latin America routes were starting to see fair start to tick over, meaning they're they're um, they're starting to fall,

especially we compare them to levels. And the markets that are just reopening are still seeing this, uh you know, this increased demand and and fair increases and so Europe is in that is in that class, Canada and then and Asia, and so I think you know, I think Delta and United will obviously they have bigger international footprints and internationals what's opening. So I think that's gonna be a bit of a tail one for them into but you are going to see I think the domestic market

cool off for the carriers. I think that's a little bit again behind United going for all these seven eight sevens. I think they probably got a really nice price from Boeing. Right now, Bowing really needs to rebuild some backlogs, and I think they're looking forward and seeing some of that strength in international markets. They have the old seven six D seven fleet out there forty five and then they're

twenty plus years old. They gotta go anyways, and so I think they said, look a good time, we'll get some good prices on seven eight seven has been a really strong performer for Boeing. I should add that's a great airplane. By the way, love flight and that thing. I mean it's coming off, you know, being um waiting on f A approval for a fix on it, which meant, you know, deliveries have been stacking up and not going

out to customers, and Boeing still printed this order. I'm sure they looked at the three fifty as well, So I think it was it was a nice endorsement for that seven. But again I think International will look better in but I think it will tap out two a little bit. And George, in terms of fairs, um, we've

seen obviously a lot of fluctuation throughout the pandemic. What about when you look at fairs, you know, the averaged out I guess, you know, remove the pandemic outlier compared to ten years ago or twenty years ago, had they really been able to increase prices as much as they you know, have seen costs rise. So I'll tell you that's really really hard to do, right, because you always have to adjust fares by the underlying fuel prices. We built a model that looked at this for a while.

You know, it's called we called it a pricing power model, right, And so you either want to be not giving back as much as lower fuel prices are giving you, or taking more than fuel prices are are taking from you. Uh, and and we find it really hard. And so that the fairs I was I was just quoting to you, we're based off at twenty nineteen levels, so we're watching twenty nineteen levels closely. And I think one of the

interesting things. You know, Delta's talking their their performers today talking three today, UM telling telling us how strong the businesses. But if you can't give me twenty nineteen level margins and the best margins we saw in this business, we're probably actually you can't give me twenty nineteen level margins. I'm going to tell you the business isn't as strong as you're telling me it is, George we Earlier this morning,

Tom Key and I were talking to Mary Schlangenstein. She she's an airlines reporter for Bloomberg News based in Dallas, and she was saying, the companies are still having real problems with getting pilots. I mean a baggage handlers. Yeah, that's that's an issue of gated tendants. Okay, but pilots is still an issue. Can you explain what's going on there?

Why don't we have enough pilots? Yeah? I mean so, you know, for years, I think we've US airlines have enjoyed taking some of those pilots out of the U. S. Military. UM military is training less and less pilots and they're having a problem I think staffing reading rooms as well. So a little bit of that. I think it is, you know, less training there. Uh. What we've seen is during times of high oil prices, there's just less training,

uh you know going on in the civilian side. Uh. And there was just a big bulge of pilots in the system that uh, you know, we're Vietnam War trained, military trained. They're aging out at six. But I'll tell you the noise. So the noise we're here and um, you know from like Southwest had investor day last week and Southwest said, look, we don't have a problem getting pilots right now, we have a problem getting them through training. Right. So training is a bottleneck. It's going to be the

same for Delta American. The place where we're seeing pilots absolutely run away from uh A is gonna have a big problem next year is gonna be the regional airlines. But it's training, that's that's the choke point. But Southwest said they're having a problem getting employees across the board. They're finally feeling staff they're a bit overstaffed. Now they're get to get people trained because they're inefficient. Right, these

are people new to the industry. UM, so I think training is going to be the biggest year across the board, and pilots again are gonna come in with a nice a increase. Right. We saw Delta pilots in the first year, I think it was five percent tem present right away gains and you know, salary in the first year, and then it got a four and a four. They're gonna have to build this into their cost structure. That's going

to make margins. That's gonna pressure margins as well. A George, I want to switch gears because you also cover the defense space, and I haven't heard that much about it, but we've got a bunch of bills in front of Congress here. What's the foot view on some of the defense contractors you follow? Yeah, so, I mean, you know, defense, it sounds like there's a lot of support for higher defense spend right the threat environment, as we say, you know,

it is heightened right now. So so you can see that there's some wrangling going on in Congress right now. Right we're still in a contending resolution that makes it really hard for the defense companies to get money rout into their newer programs um and so there's some wrangling going on now here. Year end as they look at

lifting the government debt feeling and everything. Uh, they're talking about how much money we spend on the domestic side as well, and and there's always that, right, and so I think that's going to be a challenge going forward as we try to go to higher defense budgets. There's always gonna be that side of Congress is gonna want more money spent for domestic initiatives as well. Hey, as an aside, who makes the Patriot missile? Patriots think is

gonna be a Lockheed and raceeon. I believe that's correct, because we're sending some of those over to Ukraine. So that's interesting, all right. George Ferguson the fourth, by the way, so there's three before him. He gets George Ferguson, senior Aerospace, Defense and Airline analyst for Bloomberg Intelligence. He falls that entire space there for Bloomberg Intelligence to be doing that

for decades, and appreciate getting his thoughts here. And it seems like, I don't know, every plan I'm on is packed, Um, you know, so I don't know, But I guess the real question mat is like business travel, where are we there? You know? Is that coming back? I think people here traveling. I'm sure I think business travel is coming back. Um, it just took a little bit longer than leisure travel. But the question I always have is about fairs. You know,

can they continue you to get pricing power? Yeah, and again George Ferguson had that research report on b I go out this morning saying and a lot of the U. S markets fairs are starting to come down. Uh. So that's good news for those of us looking to book.

Some bad news for investors. You know, we got these Bloomberg's opinion column things beat then they think about with some really good stuff bo you know, Bloomberg Opinion O p I n go O p I n go and then Bloomberg dot com slash opinion on uh, you know, on that intraweb thing that works pretty well. So let's bring in editor in chief Emeritus Matt Winkler to talk about his latest column. Um, the headline companies thrive where

abortion is protected and no offense. But I would say this is n I N S S. I mean, it makes perfect and that is what obvious sense. I can't give you the meaning of the acronym, but it's clear right that women are gonna want to work in states where they have uh the ability to make their own choices concerning their health. Always great to be with you, Matt and Paul Um. Yes, Uh. Intuition is a wonderful thing.

But here at Bloomberg, it's always about the data. And this is a subject that is so if you will, clouded by opinion. UM. Interestingly enough people's opinion and very little about UM the data that relates to economic performance. And so what my colleague schinpay and I decided to do, say, all right, UH, let's try to see what the data shows us about companies that are based in states that have criminalized abortions. Now this is interesting because Texas is

a big state and it's one of them. Uh and UH. It turns out that the states that since two thousand and twenty have UH guaranteed reproductive rights anticipating the repeal of Roe v. Wade have outperformed. The companies have outperformed in those states, not only the national average. And we're looking at the Russell three thousand group of companies, So this is big companies and small companies alike. They've outperformed

in numerous ways. UH. If you like total return, profitability, UH, employee per sales, those kinds of measures of performance, they're obviously more diverse as you would expect, more women in these companies and management positions, more women employees. Um. And if you put it all together, it just says that economically speaking, we're better off. Companies are better off. Corporate

America is better off where reproductive rights are guaranteed. Corporate corporate Rica has an inferior performance where reproductive rights are limited or negligent or non existent. Somebody, I know you, uh, you know some of this is you spoke with Common Secretary Gina Romundo. Uh, and that she knows that businesses are performing states where we put up to rights of preserve. Tell us how that when and what are some of

her views? Well, she's glad to get a look at the data as well, right, she said she wishes she had it when she was governor. Well, I mean she actually is very well aware of this. Maybe she hasn't gone to compile it the way we have. But don't forget Gina Romundo, if you will, comes right out of corporate America in the sense that after being a Rhodes scholar and economist with degrees from Harvard, Yale and Oxford

and a law degree from Yale University. Uh. She worked actually um in the inner city UM, and then became the first ventured capitalist in Rhode Island. And because of Rhode island failing fiscal outlook, she became treasurer, was elected treasure and did something nobody was able to do, which is fixed a broken pension system, and then did a lot of other things to fix the infrastructure of Rhode Island, but more important fix uh the well being of Rhode Island.

And that meant doing things like pre k kindergarten uh, you know everywhere um and improving the outlook for young people by forgiving students in deadness. UM. So now she's the Secretary of Commerce, and she, by the way, took her state from being one of the laggards in the US economically to one of the better performers. Now she's Secretary of Commerce, she knows a thing or two about how economies work, what gets c e o s to

do their best work. And so she knows c e o s in particular because she recruited something like thirty of them to Rhode Island. So when she sees this data, she isn't surprised at all. Actually, she says it may. It does make sense because she says, the best CEOs who recruit and developed talent are making all kinds of other decisions that are equally beneficial to their bottom line. UM well being is obviously front and center. If you have a workforce that is is liberated, UM, that workforce

is probably going to do better. I imagine if you, I mean, you could extrapolated out to a number of other health issues, for example, maternity leave. If a company offers better maternity leave, aren't they likely to attract better talent if a company offers childcare or some kind of fixed to that very expensive. So here's your answer, Matt. You know, our profession has repeatedly belittled California for its high taxes and high regulation. California is precisely the state

that does more for women and men. Are these then probably any other and corporate California over two years, five years, ten years, pick any period you like, crushes the performance of corporate Texas or any other state, because corporate California itself is more diverse and inclusive than anywhere else. So that's your answer. That's why you know we're seeing the

data that we're seeing by the way on Texas. Um, it's interesting because Gina Amando talks about going to other states and like trying to recruit because she has this data now and um, clearly, states uh that offer choice also have better performance economically. Does it look like Texas though, could be one of those states that goes from red to blue? I mean, as more companies moved to Austin, Austin becomes a much more progressive city. Uh, well, it's

too early to say. And Texas is jerrymandered. Um. If you like Democrats out of political position to gain any time soon in the legislature for one thing. Um, And uh, you know that's a that's a prevailing problem. Um. As for you know what the makeup of corporate Texas is, it's still something like two thirds in the ground. Um. What comes out of corporate Texas is two thirds in the ground. It's fossil fuel. They're making strides with alternative energy.

But it's a very twentieth century or nineteenth century state in that respect. Corporate California, two thirds of corporate California is between your ears, So it's very much twenty one century. All right, Matt, good stuff as always Matt Winkler. He's an editor in chief emeritus uh founder of Bloomberg News back in the day. We appreciate getting to check in

with him. You can find his columns and all the other good Bloomberg opinion stuff on the bloom Bloomberg terminal O p I n go is uh the ticker, and you can do it on that intra web thing Bloomberg dot com slash Opinion that they've got all that stuff up there as well, So we appreciate getting that from Matt Energy. You know, I'm looking at w T A crude oil. It's up a couple of bucks. It's still

at seventy seven dollars. My gasoline prices three. That's crazy because w T I was trading for seventy dollars on Monday morning. I know it's moving all around. Because let's talk energy. Let's round table this thing. Jonathan Maxwell, CEO and co founder of Sustainable Development Capital and Jay Halfields, CEO of Infrastructure Capital Management. They joined us both here in a Bloomberg Interactive broker studio two for two. How good is that the world is coming back? Baby? Um So, John,

let's start with you. I think first time talking to you, right, yes, okay, so tell us about what you guys are doing at your fund. Yeah, well thanks for having me on. So we um, we're in the middle of a global energy crisis. But for the last ten fifteen years, we we had st Seattle Sustainable Development Capital has been developing an investing

institutions to save energy. UM the Lawrence Living More National Laboratory, famous as an institution, even more famous yesterday for I want to ask you about that stuff coming on, but actually going back to the seventies, have been calculating how much energy is wasted in the United States. About seventy gets lost through extraction, conversion, and generation and transmission and distributions.

Just wonder why I see the flames burning out and the you know, the oil refineries and stuff like that isn't what's going on. It's one of the features. So we've we've designs and investment strategy that invests in solutions

to that problem. And that's so effectively delivering energy, lower costs, more reliable, another carbon straight to the end user and also helping end users seventy of energies in buildings, industry, and transport, so helping those end users reduce the amount of energy that they need to do the same job. So you know, J J J. You're an investor, right, so what you do is focused on obviously making money, but you're also in the energy space and to some

extent um interested in sustainability. Correct. Yes, so I was actually the first investment banker to do renewables, which doesn't really get you much because I was thirty years ago so at the head of my time. But um, so I've always been an environmentalist. But now we do have a pipeline fund, which I think is an environmental fund because we have natural gas which is the plant's coal, which is really the the near term way to reduce submissions.

So we have a pipeline et F. So that's and also co founded an energy company and based in Oklahoma that my friend my Crumble runs. All right, So, Jonathan, you mentioned this fusion thing. Um, I kind of read about it a little bit over the last couple of days, but I'm still putting regular unleaded in my in my car, so I'm not really sure what happened that it's not a flux capacitator exactly what happened at the little More facility. So I'm for years, the idea of fusion has been

a long way away. I think what happened yesterday was that you can get more energy out of fusion than it takes then you put into it. And this is a major, major breakthrough. The idea really is that at some point over the next ten thirty years, were able to generate energy, largely electricity, in much the same way frankly, that the Sun does. So this is the breakthrough, the

technological breakthrough. I think the challenge with it and many other ways of adding new energy into the system is it takes a lot of time, and you know well, and also because we already have a Sun and we don't have to put any energy into it and it

constantly gives us energy back, we just need to harness that. Yeah, there are ways of harnessing it today, and I think the two ways that we look at fundamentally is making sure that we don't waste most of the energy in the system in the first place, which is frankly how

Europe and North America is operating today. And then second of all, exactly the point you just made, actually using technologies have made up absolutely today like solar solar power installed directly on your roof, on the ground, connected to buildings. These are the types of technologies that we can deploy today if you decide, if you decide to go ahead today, you could probably have it implemented within a year or so.

And it's that speed of execution over the course of the twenties twenties which is going to be crucial for for three reasons, one of which is energy security, second of which is decobanization rapidly. We can't wait until until a lot of these new technologies are available at scale. And then the third is energy cost. Energy costs are incredibly high where I come from. They've gone up three, four or five times in the UK, in Europe, that's

a feature of what's happening in the global commodities market. Russia, Ukraine hasn't helped that. But unfortunately the United States now energy independence since is still going to be subject to global markets and energy. So energy costs are high and are rising in the United States. So for those three reasons cost carbon and and and an energy secure getting this stuff done on site generation, stopping wasting so much energy in the system, being more productive, that's exactly what

we need to be doing. That one kill a lot hour at tea time on Monday in London was two thousand, six hundred pounds. That is just nuts, um je, what do you think we need to be doing here now in order to make sure that doesn't happen to us? Well, electricity prices are driven almost directly by natural gas prices, and so natural gas can go to kind of infinity because there's an infinite demand for electricity in this modern economy.

So the United in the United States, we kind of solved the problem just by being lucky because we have the most natural gas by far, and we can drill for way more than we're drilling right now. We do need pipelines, which the administration is apparently not in favor of. For instance, um gas in what's called Waha Hub, Western Texas is trading for zero, but while in California it's spiking to you know, to unsustainably high levels because there's no pipeline from Waha to California. So, um we do

need to develop our infrastructure a little bit. But we have tremendous natural gas resources and that's why we have a cost advantage on natural gas. So our natural gas right now is is right around six dollars. In Europe, as you were indicating to let high electricity prices, it's forty dollars, you know, So it's whatever that multiple is about eight times and forty dollars, as we discussed before, is two fifty dollars equivalent of oil. So it's just

uneconomic and terrible. So but in the US we have the natural resources. We can drill for it. We just have to make sure we can. But you see that you see natural gas as a stop gap solution, not six month stop gap solution, but maybe what a six year stop gas? So I think that's the tragedy of extreme environmentalist um policy is we've restricted natural gas and so we haven't have it. For instance, there's a shortage in Boston, so we burn fuel oil, which is dirty. Year.

We should in the next five years get rid of all of our coal. We could subsidize people who need to be subsidized through carbon tax or other taxes, but we need to get rid of all the coal right away, not just for carbon. It's just an abomination. Coal plants are just horrendous if you ever been to one, And because it's not just carbon, it socks knocks, ash ash pits. It's just really and also we're breathing it in here because we're on the east coast, so we get them

that comes to our way. So it's hugely economic to do that in the short run. And so really which you need is a carbon tax, which would really make coal have a huge disadvantage and natural gas would naturally take its place in the short run, and then in the long your term, you can get renewable as they're slow to be developed, as indicated by my thirty two years of experience of doing it, and still not that big. So, Jonathan, what do you think about I mean, in extreme environmentalist

j says have made perfect the enemy of good. I think it's important not to make a sacrifice good on the altar of the perfect. But let's try. That's that's chart the journey at the molecule. This is what the Lawrence Live a more national poetry also does. Around ten percent of molecules that's gas or crude is lost in converting it once it's in. When it gets the generation systems typically large turbines, about of the primary energy, and that molecule is lost through heat. Another ten percent is

lost through transmission and distribution. So if we're going to use natural gas, let's use it which we need to. Let's use it efficiently. Let's make sure that we capture the heat that means generating energy close or right at the point where you where you use it. You can use the rejected heat instead of dumping it, which is what happening by a large to day. You can use it for heating hot water steam. So this is the if you like the transition on the revolution that we

need to see. It's actually about decentralization on the one hand, bringing energy close to the point of views, and the second point is making sure it's not wasted. Your beautiful building, Hey, I use LED lights, censors, heating, ventilation, air conditioning. Most buildings, industry, and transport systems waste of the energy that they use. The energy transition, it's not gonna be measured in months

or even years, but many, many years probably. So we always like to get back to that story with our energy discussion. We did that today with Jonathan Maxwell, CEO and co found or Sustainable Development Capital and j Halfel's CEO of Infrastructure Capital Management managing the transition to a greener energy grid. We're gonna more on all of that. Let's hoplead the good idea, good idea. Why not Anthony Conniglio, he's the CEO of New Lake Capital Partners Are this

thing is a read real estate investment trust. I didn't know there was a weed real estate investment trust thing out there. So Anthony, you got to give us the thirty foot level. Why am I doing a reat on the cannabis business? Well, thank you so much for having me. Um. Because cannabis is illegal at the federal level. It's a state regulated industry, and companies that operate in the cannabis industry need to replicate their infrastructure from state to state

because you can't transport across state lines. Wow, I never thought of that. So, for instance, if you grow like the kindest bud in Humble County, you can't sell it in New York. No, you cannot, even though it's legal in California and New York. Correct federal law or restricts interstate commerce by weed in New York. It's got to be a New York grown correct New York weeds not as good as California. Not that I know anything about this, but is there are certain states by the WAUL doesn't

know anything about this. Yeah, I don't so, um, but you put a t does in front of me, were in good shape? But so is there different quality and states whether there there's different quality in each state regulates the industry a little bit differently. So you will have some states that restrict the form factor, so they may say that no edibles are allowed, or they may say

no flowers allowed. Some states restrict th HC content. Um, So this industry really does vary state by state and requires you to understand the dynamics that exists in each one of those states. But also, I mean when we were kids, um, it was all about the sun and the earth. Now I assume most big grow ups are hydroponic and you know, controlled in greenhouses, so you can easily replicate you know whatever tie stick or Maui gold

in upstate New York. Dating you're you're absolutely right. And as you would think about it, Um, if you're selling in Michigan or you're selling in Pennsylvania, you wouldn't have the growing conditions you may have in California. And so if you look at our property is we own thirty

two properties. Half of them are cultivation facilities and these are indoor facilities that are highly complex, often medical grade facilities with light, humidity control, temperature control that allow the operators to control the environment and grow high quality product, but also allows them to turn the crop quicker. So you can get six turns in an indoor facility, whereas in an outdoor you mainly get two turns a year.

So this all sounds I've never even thought of. This all sounds great, But let me ask how hard it is to do business. I mean, you're not just a New York company just to California company, Right, You've got to do business across state lines. Um, You've got investors all over the country, probably all over the world. Um, how hard is that with the current federal legislation. Yeah,

it's very difficult because of the current federal legislation. And we do own thirty two properties across twelve states with thirteen tenants, and so managing those state rules and making sure we understand everything that's going on in those particular states, um,

requires a lot of focus. And from an investor perspective, the biggest issue for us where a public company at New Lake, and the biggest issue for US is custody because of the banking laws, and because of the federal classification, many of the prime brokers and custody agents won't custody the asset um and so that puts a chill on the ability for institutional investors to invest in the space.

So how do you deal with that? And um, are you you know, banding together with others in the industry to send real funded lobbyists to Washington, d c. To buy us some legislation. So the drama going on right now in Washington is all around the Safe Banking Bill. This is legislation that has passed the House a couple

of times and continuously stalls in the Senate. And so yes, there is a significant industry push to get the Safe Banking Bill passed so that we could ease the burden upon operators but also hopefully open up the ability for banks to custody um those that are public and custody investments in the stuff. So how do you handicap that? I mean, is it six chance that it passes? Um? You know, we've got a lame duck Congress where it could possibly go through, But it looks like time is

ticking away. It certainly is. I'm an optimist By nature. But I'm a pessimist on safe being able to bank to pass in the lame duck. I just don't think that this is an important, important enough topic UM in the Senate for enough Senators to be able to get this across the finish line. I hope it passes. It would be terrific for the industry. UM, I'm just not

optimistic it will. So where are we in terms of the number of states that have legalized of what's next up in terms of maybe some more states of note, Yeah, this is fascinating. Break it down into three segments. There are the states that don't have any real legalized program. Those are small, roughly handful of states don't have any medical or recreational segment. Two would be the medical states, those are buying large red states at this point in time.

And the first category, which is the recreational states, which now number around twenty r I think New York, New Jersey, Connecticut, a lot of the East Coast states including California and Colorado, and so all of the recreational states tend to be more democratic leaning. So the easy stuff has happened, But we're pretty excited about what we're seeing in the red states to convert medical markets to recreational So what are your facilities primarily in those blue states where you can

get on the recreational it's a mixture. In fact, we've got a property and two properties in Missouri with great tenants, and Missouri at the ballot box on November eight recently approved converting that medical market to an adult use market. So again that's a red state that UM just within the last month or two approved converting to a recreational market. And do you I mean as a recreational business better

for you. I can imagine a medical grow up is a little bit different than a recreation I'll grow up because they've got to get things exactly right with the content. Yeah. Like like all things cannabis, it comes back to the state. As you've heard me say a couple of times, there are some recreational states that are not very good states from our perspective for for the operator. Too much competition, pricing compression, significant pricing compression, like a California or like

a Michigan. UM. But the stare are some controlled states like uh, like a Pennsylvania or a Massachusetts where the licenses are more limited. And that's where we like to focus. It's a better operating environment for the operator. Um better origins and better cash flow means better credit quality because again, as a reap, it's good to do deals, but we need to be able to collect rent. How do you where do you get your I see your publicly traded companies.

You have some publicly available equity and LCP is the ticker New Lake Capital Partners. Yes, and how about on the debt side, how do you access debt capital? We recently announced that we closed on a ninety million dollar credit facility with a couple and a few national banks UM, and so that's where we can go to source capital right now. Obviously, we can issue capital. We I p

owed in auguste and raised a hundred million dollars. We've deployed that capital with the ninety million dollar credit facility and some generate internally generate cash, we have about a hundred million dollars to put to work, which we think will serve us well for the next six to twelve months, and then we'll look to evaluate if we raise more debt.

We're unlevered today and so you know it's very unusual to have a read that's unlevered um like we are today, so we have a lot of runway to add some debt capacity. One of the next states, UM to go. I mean, do you like to try and find a property in a state just before it switches to legal um. Again, that's very state specific. Certainly, when we made our investments in Missouri, we were optimistic that it would pass and we spend a lot of time analyzing that legal construct

ten Jack that yes, thank you for that, UM. But we also look to a lot of the states that are very, very large, that are fledgling, and maybe you could find a good operator in those states. I'll give you an example. Georgia would be an example as a state that we think has a bright future. Of Texas as a state that will have a bright future. User states where the market is really really small today. UM.

We're also looking at Connecticut. Connecticut is expected to go recreation with their first sales in the next month or two, and there's a lot of opportunity with companies getting into that state and building up all right, great stuff. Really appreciate your stopping by Anthony Conniglio. He's the CEO of New Lake Capital Partners that is a reet in the facility side of the cannabis business as we find out more and more about this business that continues to grow

across the US. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller. P On Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.